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Inflation Cue for Stimulus Withdrawal

Fed watches expectations closely as monetary policy approaches turning point.

By Caroline Salas and Scott Lanman | Updated on May 23, 2011

The cue for the Federal Reserve to start withdrawing its record monetary stimulus may be a measure of its own credibility: inflation expectations.

Expectations for annual consumer-price gains have jumped by 43 percent to 2.10 percentage points since the central bank began its second round of asset purchases in November, as measured by the breakeven rate for five-year Treasury Inflation Protected Securities. The measure is close to levels before the recession — when the central bank’s benchmark interest rate was 5.25 percent, compared with about zero today.

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